It is common for companies to offer incentives for employees to refer friends and family to apply for vacancies, but new research from the University of Melbourne shows this practice can have a long-lasting negative impact for an employer.
The research was completed by Dr Chung Yu Hung and Professor Anne Lillis from the University of Melbourne, and Professor Anne Wu from National Chengchi University (Taipei).
Using a manufacturing company in China as a case study, researchers found an employment referral scheme led to lower production quality because referred employees were more likely to know about and take advantage of weaknesses in a company’s performance reward system. In this case, the company’s weakness was they were not able to determine which individual employees were responsible for production defects.
“Our research shows if agency problems exist in an organisation, a referral scheme for finding new workers can exacerbate the problems,” said lead researcher Dr Chung-Yu Hung.
“Referrals were one of the company’s main channels for finding new staff, but a prospective employee who knows somebody at the company may already have the knowledge of existing opportunistic behaviours. When the prospective employee shares the same attitude, they are likely to join the company and also take advantage of the system for their own benefit,” said Dr Hung.
In this case, an agency problem is where an employee is supposed to be working in the best interest of their employer, but instead, works in a way that maximises their pay at the sacrifice of the employer’s benefit. This could include, for example, taking shortcuts to produce more items at the expense of quality, or having longer lunch breaks without the supervisor knowing.
The company used incentives for employees that give rewards on two measures: production efficiency and quality.
“The company was suitable for the research because they were able to measure production efficiency precisely but had less reliable measurements for which staff were responsible for quality. This gave employees an opportunity to game the system and sacrifice quality to maximise efficiency,” said Dr Hung.
The researchers analysed monthly data for a three-year period including over 7000 employee reports. It showed that employees who were referred to the company by existing employees were more likely to maximise their bonuses at the expense of quality.
“Furthermore, we found the referred employees who took advantage of the system were more likely to stay with the company. Over time, this would have further negative impact on the quality of the products being manufactured,” said Dr Hung.
Dr Hung said that the study shows that information existing employees share to the labour market will determine the type of prospective employees that join the firm. This insight can be applied to workplaces outside of manufacturing, including in offices and financial institutions.
See the full research article in The Accounting Review by the American Accounting Association. It is available in open access.
Media enquiries: FBE Communications Team, FBE-media@unimelb.edu.au